College Prices are Proof That the Government is Ineffective

Ask any hopeful, current, or recently graduated college student what the worst part of college is and they will most likely come up with answers such as “the price of tuition”, “student loans”, or “college debt”. Today students can be found burying themselves in debts (sometimes the size of a mortgage) to get a degree: sometimes a hopeful STEM or medical degree other times a virtually worthless liberal arts degree. The worry of getting the price of tuition, room & board, textbooks, etc. paid has not always been a huge issue for college students though. According to Business Insider In the 1980s the cost of living on campus and pursuing a four-year degree with all costs included was $9,438 per year. Students were able to work there way through school to pay the cost of attendance and graduate with relatively small loans to pay off. Business Insider goes on to say that between 1980 and 2014 the price has skyrocketed 260% to $23,872 per year. Someone may say that the rise in price comes from inflation, but Business Insider says otherwise because the CPI (Consumer Price Index) has only increased by 120% since the 1980s. Why have college prices gone so far up while the average of all other prices has increased regularly with inflation?

Just like many other financial problems our country has seen, the root of the problem can be seen to be too much government involvement. This time the government involvement takes the form of federal student loans: loans are given to students by the government to pay for secondary education expenses. Federal loans sound great in theory because everyone can get a loan without discrimination and the government can guarantee low-interest rates to students. In reality, however, these two aspects that seem good are actually two reasons why tuition prices are rising so high.

Traditionally if an individual wanted a loan for a house or car that individual would go to a bank to try and get a loan. When asked for the loan the bank will ask for personal information about annual income, how the income is earned, debts still owed, assets, credit scores, and many other topics. Banks do this so they can assess the risk of a possible borrower, or in other terms calculate the odds based on the likelihood of a borrower paying back the bank. Some may say this form of questioning an individual and profiling them as low, medium, or high risk is discriminatory and unfair to poor people. Those people need to realize that banks only make money on a loan if they sell it or the borrower pays them back, and the odds of those two happening greatly decrease if the potential borrower has a low income, massive debt, no assets, and/or a bad credit score (if the potential borrower is poor). So banks, to be sure that they are profitable, have to “discriminate” against poor people.

Banks do not only use this technique of profiling individuals based on risk to decide if an individual should receive a loan, but they also use an individual’s risk to determine the interest rate of a loan. Higher risk individuals being given higher interest rates so banks have a larger payoff to offset the likelihood of a defaulted loan. Lower risk individuals being given lower interest rates because a bank does not need a larger incentive when there is a low likelihood of a loan being defaulted.

If we were to look through this time period of 1980 to 2014 we would see that as the price of college rises higher and higher, the amount of people on these cheap federal loans also rises. But how could people being able to receive cheap loans raise the price of college tuition?

When college first started becoming a mainstream path after high school for the average person it would cost the student a couple to a few thousand dollars which could be worked off with minimal student loans. When getting first involved in the student loan industry the government came in to give people, who were discriminated by banks for being high risk, loans with low interest rates. The government could do this because they are backed by taxpayer dollars and the federal reserve, so they can “afford” loan defaults. When these poorer people were just given the money by the government they had no reason to complain to colleges that they were priced too high, because they technically had the money to pay for it. In turn, the colleges did not need to lower the price.

The government did not only guarantee a loan to anybody with the lowest interest rate. The government guaranteed a loan to any tuition no matter how high the price was. This created an opening for the colleges to price tuition and other costs at whatever price they wanted because college students are handed this “cheap” money, so the college students do not have to worry about the price. As the prices rise higher and higher for a secondary education the government just continues to subsidize these prices more and more. This pattern has created an endless cycle where government involvement is the issue, but government involvement is also seen as the way out. Bringing prices to where they are now: astronomically high.

If the government never got involved in the college industry the price of college would probably only have raised as much as the general CPI, remained neared it, or even gone down. College prices certainly would not have raised 260% in a thirty-four year period. Colleges would not be able to build fancy recreation centers and dining spots while charging an engineering student to take credits in an ethnic studies course that they will never use again. If the free market was the only driver in college price and function, colleges would be forced to reach the lowest price while still getting the maximum education from a degree. Instead, the government tries to help students by getting involved, and the colleges receive huge profit margins that the students have to pay for.

Will there are a few problems with your logic that you probably want to address.

First, it seems that you started your “research” knowing what answer you wanted to find (i.e. the problem is government and nothing else exists in the world). Your predetermined results and hyper focus on single variable reduce your ability to really examine what you are studying. This may play to your assumed readership, but it certainly doesn’t make your argument very strong.

Second, you fail to examine tuition in relation to other services/commodities. Your argument rests on the assumption that the only commodity/service in the economy that has increased in this manner is higher education and all other commodities/services increased at the same pace as the average rate of inflation. Legal services, dental services, and funeral costs have increased at very similar rates to higher education (if not higher).Interesting that highly educated workers expect increases in wages even though their focus is on quality rather than explosive productivity growth, which would offset wage increases. Moreover, unlike those who cut hair at Cost Cutters (pun intended), they may be less likely to accept terrible wages due to their highly specialized skill sets.

Third, you fail to examine how the university changed over the past 40 years. You have the base assumption that the role and physical characteristics of the university haven’t changed and that the pressures among those who work there is exactly the same as it was 40 years. It seems unlikely that the universities teach the exact same thing they taught 40 years ago and technology costs would remain flat (especially, when we focus on STEM programs). Moreover, it ignores that technology requires specialists not only to run it but specialists to maintain it. For example, physicists, statisticians, etc., may be wonderful at running numbers, but it doesn’t mean that they are capable of maintaining the hardware required to run their statistical software. Or, even if they are capable, it probably isn’t a good use of their time and certainly not something that Adam Smith would advocate.

Finally, this is only a partial list of things that you have failed to consider.